1. Lesson 14 – Money around the world
Exchange Rates
Lesson 14 – Money around the world

2. Exchange Rate
The price of one nation’s currency in terms of another nation’s currency
Fixed – prevented from rising and falling with changes in supply and demand
Flexible – free to float with changes in the supply and demand

3. Factors that affect exchange rates
Changes in preferences for foreign goods
Relative incomes
Inflation
Interest rates
Speculation on future values of foreign exchange

4. Changes in preferences
More Americans want to buy Japanese goods – yen would be worth more dollars because demand for yen would increase and supply of US dollars would decrease

5. Changes in prices in different countries
High inflation in Russia would make Russian goods more expensive than American goods. Russians would demand more US $$ to buy cheap US goods (supply more Russian rubles, demand more US $$$) dollar would be worth more

6. Changes in interest rates in different countries
10% on savings in Europe and 2% savings in US, Americans would demand more Euros and supply more $$$
Euro would be worth more dollars

7. Changes in income in different countries
Income in US increases compared to Mexico. People in the US buy more Mexican goods. More supply of US $$$ and more demand for pesos
Dollar would be worth fewer pesos

8. Speculation
People think the dollar will increase in value compared to the Euro, they will buy more $$$ (demand) and sell more Euros(supply)
Dollar would be worth more Euros

9. If the foreign exchange rate between the Australian Dollar and the Indian Rupee is 1:1.57 then 3 Indian Rupees equals how many Australian Dollars?

10. If the foreign exchange rate between the American Dollar and the Australian Dollar is 1:1.50 then 24 Australian Dollars equals how many American Dollars?

11. If the foreign exchange rate between the Australian Dollar and the Hong Kong Dollar is 1:2.80 then 56 Australian Dollars equals how many Hong Kong Dollars?

12. If the foreign exchange rate between the Mexican Peso and the Botswana Pula is 1:0.40 then 85 Mexican Pesos equals how many Botswana Pulas?

13. 3 currencies
1 WELCO = 2 DEVCOs
1DEVCO = 2 LESCOs
1 WELCO = 4 LESCOs
If a bicycle cost 25 DEVCOs, what is the price in WELCOs? LESCOs?

14. Depreciating currency
A currency depreciates when it buys less of another currency

15. Effects of Depreciation
If you go to Italy on vacation and the $ is worth less, you have less money to buy local souvenirs.
If you are an American business and you buy parts from France, your resource costs will increase
If you are a Japanese firm and you buy solar equipment from the United States, you will buy more

16. Appreciating currency
A currency appreciates when it buys more of another currency

17. If you go to Japan on vacation and the $ is worth more, you have more money to buy local souvenirs.
If you are an American business and you buy parts from Spain, your resource costs will decrease
If you are an Israeli firm and you buy planes from the United States, you will buy less